If NRIs sell property after three years from the date of purchase, they are liable for LTCG tax

Lately, many non-residents Indians (NRIs), especially from North America and Europe, are coming to India to sell their property. Holding on to real estate in India and maintaining it is not an easy task. Depending on relatives and friends for long is also not feasible.

After selling the property, the next challenge is to remit the money back to the country of residence. Though it may sound complicated, but in reality it is not.

Taxation

If NRIs sell property after three years from the date of purchase, they are liable for long-term capital gains (LTCG) tax of 20%. The gains are calculated as the difference between sale value and indexed cost of purchase. Indexed cost of purchase is the cost of purchase adjusted to inflation. Calculation of indexed cost of purchase can be done through online calculators.

In case of inherited property, the date and cost of purchase for purposes of computing the period of holding as well as cost of purchase is taken to be the date and cost to the original owner. While computing LTCG, the cost to the previous owner (the person from whom the property is inherited) would be considered as the cost of purchase. NRIs are subject to a tax deducted at source (TDS) of 20% on LTCG. But there are certain instances wherein NRIs can get a waiver on TDS—say, if the NRI plans to re-INVEST the capital gains in another property or in tax-exempt bonds.

If an NRI sells a property within three years of purchase, she will be liable for short-term capital gains (STCG) tax at the respective tax slab. STCG is calculated as the difference between the sale value and the cost of purchase (no indexation benefit is available). NRIs can apply for a tax exemption certificate. The NRI must make this application in the same jurisdiction from where she obtained her Permanent Account Number. She will have to show proof of re-investment of capital gains. If she plans to buy another house, she would have to show the allotment letter or payment receipt. If she plans to invest in capital gains bonds, she would need to submit an affidavit. Usually, the buyer holds back the last instalment of payment until this certificate of exemption is furnished by the NRI.

Tax exemptions

According to section 54 of the Income-tax Act, if an NRI sells a residential property (after three years from date of purchase) and re-invests the proceeds in another residential property (within two years from date of sale), gains will be exempt to the extent of the cost of the new property. Suppose capital gains is Rs.1 crore and the new property is bought at Rs.80 lakh, then Rs.20 lakh will be treated as LTCG. The residential property that you sell may either be a self-occupied property or one that was given on rent. Further, the new property must be held for at least three years.

NRIs cannot INVEST the proceeds in a foreign property and avail the benefit of section 54. However, a few hearings with the appellate authorities have held that exemption can be claimed under section 54 even if the new house is purchased outside India. It is not specified clearly under the law but it is advisable to consult a tax consultant. According to section 54EC of the Income-tax Act, if an NRI sells a long-term asset, in this case the residential property (after three years from the date of purchase) and invest the amount of capital gains in bonds of National Highways Authority of India and Rural Electrification Corp. of India within six months of the date of sale, she will be exempt from paying capital gains tax. The bonds will remain locked in for a period of three years.

Repatriation

General permission is available to NRIs and Persons of Indian Origin to repatriate the sale proceeds of property inherited from a person resident in India subject to conditions. If those conditions are fulfilled, NRIs need not seek permission from the Reserve Bank of India (RBI). However, if the property has been inherited by an NRI from a person resident outside India, then the NRI must seek specific permission from RBI. The conditions mentioned that NRIs need to satisfy before repatriation of MONEY are not complicated. The amount per fiscal (April-March) should not exceed $1 million. Repatriation should be done through authorized dealers. NRIs must provide documentary evidence with regard to inheritance of property and also a certificate from a chartered accountant in the specified format.

NRIs also need to check the income tax implications in the country of residence. Many countries tax their residents on their worldwide income. Some countries do provide partial or total exemption on capital gains arising on sale of a residential house if certain conditions are met. Also, if there is income tax liability in the country of residence on the amount of gain then the taxpayer should re-evaluate if she should consider claiming exemption under sections 54/54F/54EC. In such cases, the taxpayer may be better off claiming only partial or no exemption in India on capital gains.